What must be considered to measure custodial credit risk in cash deposits?

Measuring custodial credit risk in cash deposits involves evaluating the risk that a financial institution holding cash on behalf of a depositor may fail to meet its contractual obligations, which can lead to the loss of those deposited funds. The bank balance is fundamentally important in this assessment because it reflects the actual amount of cash held at the bank and is directly exposed to custodial credit risk.

When determining custodial credit risk, it's crucial to consider how much cash is maintained in a financial institution since any failures at that bank could jeopardize those funds. The bank balance gives a clear snapshot of risk exposure at a specific point in time.

While physical currency held provides a view of liquid assets, it does not indicate the bank's reliability. Cash flow statements reflect the timing and amounts of cash movements but do not directly address the risk of loss in custody. Investment securities, although relevant in a broader financial context, are not considered when focusing specifically on cash deposits and the associated custodial credit risk. Therefore, analyzing the bank balance directly confirms the degree of risk inherent in the cash deposits in question.